Janet M. Dery, Esq.

           On September 30, 2012, the $7.5 billion dollars allocated in the SBA's current fiscal year budget for the 504 temporary debt refinancing program (the "Program") will no longer be available. In order to attract more lenders and borrowers to the Program before then, the SBA has published its final rule ("Final Rule") on October 12, 2011. With this Final Rule, as discussed in SBA Policy Notice 5000-1225, dated October 19, 2011 (the "Notice"), the SBA has expanded (i) the eligibility criteria for the Program and (ii) the use of the proceeds of the "Refinancing Project".

            One of the most attractive revisions for both lenders and borrowers is the inclusion of eligible business expenses in the Refinancing Project. As stated in Section (3) of the Notice, "'[e]ligible business expenses' means the business expenses of the Borrower, such as salaries, rent, utilities, inventory, or other obligations of the business that were incurred but not paid prior to the date of loan application or that will become due for payment within 18 months after the date of the loan application."   Eligible Business Expenses may be financed as part of the Refinancing Project only so long as "Qualified Debt" (as defined in the Program) is less than 90% of the fair market value of the fixed asset(s) securing the Refinancing Project, which is the maximum loan amount under the Program. The ability to offer working capital as part of the Refinancing Project enabled by this revision provides lenders with a highly-marketable feature with which to attract new borrowers.        

            Another revision intended to make the Program more appealing is the clarification of the definition of "Qualified Debt" in respect to the "Substantially All" or "85% - 15%" requirement. The Final Rule requires only that the original financing be a commercial loan where at least 85% of the loan amount was for the acquisition of the fixed asset(s) securing the loan and the remaining 15% was for other business expenses of the Borrower. Therefore, even if the original purchase debt has been refinanced and such refinancing does not retain the required percentage breakout, the debt can still be considered eligible.   This new limitation of the requirement to only focus on the original financing of the fixed asset(s) makes it easier for borrowers and lenders to meet the SBA's qualification requirement.

            An additional change designed to facilitate use of the Program is the clarification of what it means to be current on the existing debt to be refinanced. Section 1(d) of the Notice states that a Borrower shall be considered current on all payments due so long as "no payment scheduled to be made during the one year period was more than 30 days past due from either the original payment terms or modified payment terms (including deferments) if such modification was agreed to in writing by the Borrower and lender of the existing debt prior to October 12, 2011."     Therefore, even if a borrower was operating under a modified payment plan or forbearance agreement, the borrower can be eligible so long as no required payment was 30 days past due. This clarification should attract those borrowers who were previously ineligible for the Program because they couldn't show monthly payments for each month during the previous year.

            Finally, third party lenders are no longer required to finance 50% of the appraised fair market value of the fixed asset(s) securing the loan. They are only required to finance the same amount as any third party lender under the other 504 financing programs - at least as much as the CDC's loan amount. This relaxation of the loan amount requirement makes the Program significantly easier for lenders to participate.

            In summary, the Final Rule, with the inclusion of the expanded eligibility requirements and clarifications (and including some minor clarifications to the occupancy requirement and the interim lender/escrow account requirement), will allow more businesses to become eligible for the Program and provide lenders with more marketing tools to attract new borrowers.    

           For more information on the Program requirements, contact Janet at jdery@starfieldsmith.com, or 215-542-7070.

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